They Say "Housing" But Refer to Land
Housing Was at the Root of the Great Depression, Too
The similar role played by land in the Great Depression and Great Recession is remarkable. How is it that housing was a key player in the two largest recessions of the modern era yet ignored? The connections merit new inquiry. This 2012 article is from Bloomberg, Sep 25.
by Evan SoltasThe U.S. economy slips into recession. The stock market takes a tumble as heady expectations for future growth cool. Interest rates fall as the Federal Reserve quickly trims the discount rate in hope of cushioning the business cycle.
The low interest rate environment sets off a massive wave of home construction and an asset bubble in real estate. By the time the Federal Reserve takes action, the boom is completely out of control. Bank balance sheets and household savings have become dependent on the profound mispricing of real estate and other equity holdings.
The heedless extent of leverage [borrowing to speculate] makes the financial system extremely vulnerable to capital losses. As the housing bubble implodes [after locations have absorbed so much spending that people can't afford to purchase enough other stuff], it pushes the economy into a long, deep recession.
This is the economic story of the last decade -- and of the 1920s. Milton Friedman and Anna Schwartz famously pinned the Great Depression on passive tightening of monetary policy, and Fed Chairman Ben Bernanke and other scholars highlighted the role of the gold standard and the collapse of international monetary order. But economists and commentators have largely overlooked the role of housing in the causation and intensification of the Great Depression. This long-standing oversight deserves correction.
The stories of the 1920s and the 2000s are parallel even in the way the bubbles popped. In both instances, the housing market cooled early but gently, transferring speculation into stocks. The broader economy overheated and then fell into contraction, leading to sharp markdowns in real estate asset values, which precipitated true crisis. And in both cases, interest rates were forced to the zero lower bound as problems in the housing market disrupted a key component of the transmission mechanism of monetary policy.
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JJS: Part of the problem is that the real factor is called “housing” when actually it’s land, or more precisely location.
Another problem is academic economists about a century ago consciously made the effort to bury land in capital in order to muddy the picture of how insiders really amass their great fortunes.
And it’s not just economists who don’t want to see land -- most don’t. They’d rather speculate in land. Since trying to get something for nothing is a bit shameful, and land is something beautiful and essential that not one of us made, people prefer to keep separate guilty speculation from innocent land. After a while, land became invisible to almost everybody.
That makes it nearly impossible to do economics scientifically, since land absorbs most of everyone’s spending. As the price for land rises, and people spend more for something nobody made, they have less to spend for the goods and services that one’s neighbors do make. The result: recession.
Ignoring land, conventional economists can not make accurate predictions, and don’t even bother. None of the so-called “Nobel” laureates ever forecast accurately. But the geonomists did, in advance, in print, nailing the exact year, and explained why it had to happen.
But recessions do not have to happen. To avoid them, all that society need do is to recover the socially-generated value of land. Then nobody will have any motive to speculate in land, there won’t be a bubble, and no recession.
Call it geonomics. And win it. It has worked wherever tried.
Editor Jeffery J. Smith runs the Forum on Geonomics and helped prepare a course for the UN on geonomics. To take the “Land Rights” course, click here .
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